Martha aside, Kmart needs shaking up

Kmart last week settled all the post-trial speculation swirling around its relationship with Martha Stewart by announcing that it has extended its contract to be the sole U.S. distributor of Martha Stewart Everyday goods to 2009.

For Martha Stewart Living Omnimedia, the two-year extension was nothing less than a show of faith in the brand. Omnimedia has contended since Stewart's legal battle began in 2003 that the Stewart brand has reached a point where it supersedes the tribulations of Stewart the celebrity. Kmart, apparently, is backing that horse.

Of course, Kmart also presumably received some concessions for doing so. As it extended its contract — and pledged to take the brand into additional product categories, including ready-to-assemble furniture — Kmart also announced it was withdrawing its February lawsuit against Stewart's company.

That brief tussle over royalty payments provided a rare peak at the pair's financial arrangement. Kmart at the time claimed that Omnimedia was demanding royalty payments that exceeded its contractual agreement. The retailer also accused Stewart's firm of double counting.

Omnimedia, in turn, fired off a statement that more or less painted Kmart as a company attempting to welsh on its obligations. The company said Kmart was trying to lop off $4.5 million from the $52 million it owed on sales of Martha Stewart Everyday goods during the just-concluded fiscal year. It also revealed that Kmart wanted to reduce its advertising requirements in Stewart's media properties by $1 million to $2 million per year.

When Kmart announced last week that it had dropped its lawsuit, it also noted that the new agreement eliminates minimum guarantees by product category — although the aggregate minimum in the contract remains the same. Presumably, this will alleviate some of Kmart's immediate-term financial obligations, but allow Omnimedia to get its full do in the longer term.

That's not unlike some royalty reworking Omnimedia agreed to a couple of years ago while Kmart was in bankruptcy, which gave the retailer some near-term relief on the understanding that it would make good in the long run.

Kmart seems unlikely to place all its bets on the $1.5 billion Stewart program, as best indicated by the recent opening of a New York design office and the hiring of former Donna Karan consultant Matthew Morris as the design team's divisional vice president of home.

Even if one assumes Stewart's brand equity will remain entirely unbesmirched by recent legal troubles — and I speak as one who plunked down $100 on Everyday cookware the day after she was convicted — Kmart's home department needs some shaking up. The Stewart-dominant set has been in place for quite some time now. The additions of captive Thalia and Joe Boxer merchandise have brought limited diversity to the overall assortment.

Will the new design team take a page from Target's book and impose a fresh vision on Kmart home? They ought to. The time is ripe.